The Federal Housing Administration will likely continue to offer reverse mortgages despite talk of program changes due to FHA’s financial position, writes a Sterne Agee research note published last week.

“We do not believe Congress is going to let the [FHA] kill reverse mortgages and incur the rage of the AARP,” the report states in response to the announcement by FHA that it will make changes to its reverse mortgage program including putting a hold on the fixed-rate full-draw product.

“It’s politics as usual in D.C.,” the analyst writes. “In a recent letter to Congress, the [FHA] agreed to let one aspect of the reverse-mortgage product go (the Standard mortgage). But the [FHA] did not put the second reverse- mortgage product, Saver, on the block. Under the Saver product, borrowers are likely to receive 10%-to-18% less in a loan. By lowering advance rates [meaning lower LTVs, or loan-to-value ratios], losses to HUD should be lower.”

Following the statement from FHA, Walter assured its investors that the acquisition was still profitable and that company executives did not foresee reverse mortgage volume taking a hit as a result of a shift away from the fixed rate lump sum product.

Sterne Agee agreed the RMS business segment would not suffer under the changes.

“Walter Investment is expected to make approximately 65 cents per share from its reverse-mortgage segment. We do not see this product going away, and our analytics suggest the company would make more money from the Saver product,” the analyst writes. “Also, industry sources tell us that reverse-mortgage originators have been building on a likely transition from “standard” to “saver” for months.”

Related

Wait till AARP wakes up and notices that HECMS are only available to “well qualified”, upper middle income senior citizens and that the ones who really need the loan can’t get one. Therein lies the flaw in the industry’s focus on Financial Assessment rather than in reducing the PLF’s to make the program less generous and therefore less risky from an insurance perspective.

hecmvet

If the program was structured to where it no longer posed a threat to the FHA insurance fund, it would become a candidate for the conventional market with Private Mortgage Insurance and HUD wouldn’t need to be involved at all. Where did we get the idea that the government could shoulder greater risk than the private sector? After recognizing the program’s need to materially adjust PLF’s the second most significant element of hecm’s that could be adjusted to reduce risk would be to reduce or eliminate credit line growth. Credit line growth as it is currently structured is based partly on the assumption that homes will experience average annual appreciation of 4 percent which hasn’t occurred since 2006 and won’t likely occur anytime soon if ever again. Most industry “spokesmen” insist the program could not exist without HUD’s involvement. I disagree.

treverse

To put it simply: What else are they going to tell there investors? We made an untimely decision to purchase RMS. “The acquisition is still profitable” Let’s put that one on hold and see how that works out a year from now.

The_Cynic

hecmvet,

You miss several significant points.

HUD is not the lender. It receives MIP which proprietary lenders charged through higher interest rates. While that may be little more than semantics as to costs to the borrower, it makes HECMs much better products on the secondary market since the investor takes little risk on their investment. Many believe that one of the big problems for Financial Freedom was trying to dump their Cash Balance mortgages somewhere; holding onto these investments drains far too much liquid asset resources.

HUD does not incur general and administrative costs. Those are paid for from annual appropriations. That leaves the MIP free to cover losses only.

Finally HUD has no profit incentive. It must keep reserves of 2% but that is of the outstanding HECMs not those previously terminated. Since few HECMs in the MMI Fund (those endorsed after 9/30/2008) have terminated, we have little idea how terminations will permanently impact the reserve.

So here it is in summary. HECMs work in the secondary market while proprietary have no such record. HECMs do not have to endure general and administrative costs or return profits to investors.

So how can proprietary reverse mortgage lenders compete with HECMs?

The_Cynic

hecmvet,

Are you saying that adjustable rate HECM Standards are no longer capable of helping the less fortunate the way they did prior to fiscal 2010? Remember back then net proceeds available for mortgage payoffs and the pockets of seniors were after servicing fee set asides.

Or are you saying that you have some insight into what the financial assessment from HUD will look like? If that is what you are saying, please help the rest of us out by making it clear to all of us exactly what it will look like.

To some small degree, HECMs have harmed the financially desperately. By paying off larger mortgage balances, the reduction to cash outflow in many cases was insufficient to provide the kind of monthly cash flow some seniors needed to pay property charges. For this segment of borrowers, the home value crash means that the equity they had when they took out their HECM is totally and completely lost. Was the HECM little more than a poor financial trap for these seniors? Perhaps to the majority of them.

As a fiscal conservative, why should senior homeowners have a government SUPPORTED welfare benefit that other seniors cannot obtain. Many of the most financially destitute seniors who took HECMs during the middle of the last decade probably should have downsized THROUGH a wise use of Traditional HECMs rather than trying to age in place. At least they would have kept some of their equity and in many cases their expenses would have decreased due to lower utility costs.

John A. Smaldone

I have made my self clear on this subject many times before. To rely on the saver as being the saving grace fixed product is ridicules. The Saver has proven to be a program that can’t supply the need to the senior that is needed.

I have spelled out what I felt was needed to solve the problem. However, what many of us who have been in the reverse mortgage industry for years say or recommend, goes on deaf ears.

There are many other alternatives available other than cut the LTV down any more than it is but our senators and agency leaders need to be open minded and look at the history of the housing crash and how the reverse mortgage ran into trouble on paper!

John A. Smaldone

The_Cynic

John,

Many times before you have recommended returning us to the status we were before 2009. That is a major part of what will be done with the termination of the fixed rate HECM. So they are listening to you. Neither GNMA nor FHA (i.e., HUD) just cannot undo HERA to encourage FNMA to buy HECMs.

As to providing Savers to the house rich, cash poor seniors (a euphemism for financially destitute senior homeowners), you are right. It will NOT work. But isn’t that part of our mixed up and muddled past in trying to make the HECM problem into something it was not, a way to keep financially strapped seniors living in place? That is exactly how defaults are at 9.8% rather than the less than 2% we were told over and over again they were at less than 2 years ago? It is also why the HECM portion of the MMI Fund was in a cumulative $2.8 billion loss position as of September 30, 2012.

Why we have failed at Savers so far is that we have few in the industry who know how to present them to the mass affluent or “not-quite-affluent” senior population or even more importantly their INDEPENDENT advisors. (Few of those who sell insurance have any idea what is the importance of being independent and to some degree even some of those registered to sell securities. Forget about any but a few of those managing portfolios for seniors based on a percentage of the value of the assets under management attaching any importance to being independent; the overwhelming majority of these managers simply have no idea what being independent means.)

Unlike even HECMs for Purchase, Savers have their strong proponents in the financial planning community; some of them are not even looking to make money from their continued advocation of Savers. When looks at the sheer size of this market and its need for Savers, it is very, very difficult to be anything other than curious as to when will the industry catch up to where we should be with this product.

The day of this product being primarily for the financially needy are not ending but are contracting. Why else would we see ever shrinking endorsement numbers? Our future is in another direction. These future clients are not interested in simply saving their homes but rather improving their odds of maintaining their present level of cash flow throughout retirement. This is not increasing lifestyles or financing yachts. It is in making sure what they have today in adequate cash flow can be maintained throughout retirement despite the ravages of inflation and ever changing markets. The HECM was never intended to cure the problems of the financially destitute but it was created to help meet the special liquidity needs of seniors in respect to health, housing, and subsistence (more than just basic subsistence) during the traditional retirement years.

John was talking about fixed rate savers and you went off about Libor Savers?

hecmvet

Hi Mr. Smaldone, Can you please elaborate on the “many other alternatives” to cutting ltv’s.

John A. Smaldone

Cynic,

You always bring up good points, this why I respect you as much as I do. I don’t know if I want to go back 100% prior to 2009 but there were many area of the program that favored our seniors as well as the industry.

You are right about the plan becoming less and less for the needy, I agree with you on that all the way. However, I feel this has been the intent all along.

Our government contradicts themselves. In one breath they want to tax the rich and on the surface makes you believe they want to help the poor and middle class.

When you look at what is being done to the structure of the reverse mortgage, just the opposite is occurring. This is the society we live in today my friend. Thank you for your reply to my comment, I appreciate you for it. Make it a great day.

John A. Smaldone

REVGUYJIM

Until reverse mortgages can shed their image of being one step above bankruptcy on the financial strategy ladder, they will be hard-pressed to gain traction among other than current needs-based borrowers.

John A. Smaldone

Hecmvet,

Thanks for the question. First off, turn the fixed into a product that will have all the options the ARM product has. This in itself will reduce the lump some option drastickly. A greater percent of seniors would rather not take a lump sum but because of the fixed rate features and LTV amount they are forced into the lump sum.

The lump sum requirement has made this product more vulnerable as a loss to FHA than any other product. The loan the way it is designed today starts out of the gate as a fully drawn maxed out loan.

Another area that would curtail foreclosures, which FHA dreads foreclosures on the fixed rate product, is to establish an escrow account. The escrow account would be for the taxes and insurance.

I am not talking about a set aside fund but a true escrow account the same a forward mortgage. I know there is pro’s and con’s on that but when you think about it, a senior can m,manage monthly expenses easier than lump sum surprises at the end of the year. The servicer would establish the escrow account with 3 months of taxes and insurance, the seniors would receive a coupon book each year to make their monthly payments and I gaurentee you that there would be a major reduction of delinquent T&I and foreclosures.

I can go on and talk about other alternatives and ways to avoid the foreclosure pit fall and I would be happy to discuss it on the phone with you.

By lowering the LTV on the fixed rate product will only remove a large part of our senior population from being able to obtain a reverse mortgage.

Is this what our government and the people behind all the changes we see want?

I hope I answered your question some what Hecmvet, I will be glad to discuss more with you. Make it a great day.

John A. Smaldone

The_Cynic

Thomas,

So what you are saying is that seniors are refinancing in an era (since the turn of the century) when credit requirements are the strictest and reliance on repayment rather than collateral is at its highest. I find that an odd and very strange explanation when addressing the largest segment of fixed income homeowners who are the least likely to use credit.

Perhaps you have other than subjective or anecdotal evidence supporting your position?

The_Cynic

Thomas,

I was addressing this statement by John: “The Saver has proven to be a program that can’t supply the need to the senior that is needed.” Perhaps you do not believe that the Saver program includes adjustable rate Savers.

I cannot account for what you think you read or how you classify HECMs. But there is no HUD classification of Savers called “Libor.”

The_Cynic

REVGUYJIM,

Is that an image problem created by others or by our own marketing? In “appealing” to “the house rich, cash poor” senior segment did we illogically manufacture our own greatest barrier into the mass affluent community?

Whether or not we significantly contributed to the image problem you describe, should we passively do nothing, hoping that the situation will turn around on its own or should the industry spearhead a campaign to “reverse” that image? Allowing this view to fester and grow does not seem to be the appropriate response. With the support of people like Dr. Salter, and Harold Evensky, delaying our efforts is ill advised.

EricSD

Hi John, I wanted to ask you a question regarding the statement you made about lowering the LTV on the fixed rate thus removing a large part of seniors who would be able to get a reverse mortgage, why is this? To the best of my knowledge the adjustable product will stay the same which currently gives the same principle limit as the fixed and actually starts with a lower rate. I know we can charge origination on this as well but if it was needed the originator has the ability to reduce it to make a loan work. This is what we all sold before the fixed product came in with the lower rates that we see today and it worked just fine. Plus, and correct me if I am wrong, but doesn’t the adjustable product negate the Dodd / Frank law and level the playing field between banks and brokers? Brokers will now be able to charge, reduce, or waive origination fees with no consiquence to their YSP. And even use the YSP to pay for closing costs if need be. Right now banks get to do whatever they want and can offer “No Fee” loans with no origination and use part of the YSP to pay for closing costs and still keep all that is left. Brokers cannot do this and in a competitive situation either lose the deal or make way less than the banks would. I know endorsements are down but the product is still here and what we need is higher home values, that will make the numbers go up more than anything. Eric

The_Cynic

John,

There is no HUD rule against fixed rate open end HECMs. But how could a lender financially and economically justify offering them?

Let us say a foolhardy lender decides to offer the product. Some more financially sophisticated seniors see the opportunity and grab them in early 2013. Now in say 2014, the home market is off to the races with increases at an annual rate of 20% on Eastern Tennessee SFR rental properties and let us say at the same time five year CDs are paying out at 6.25%. So these sophisticated seniors start raiding their fixed rate open end HECMs accruing interest at just 4.5% to buy those SFRs in your back yard.

What just happened to the HMBS investors? They will be incurring costs greater than 4.5% just to fund these open end fixed rate HECMs. So who would want to create or buy such potentially lousy investments? That is why they have never been offered.

HECMs do not create miracles or income. They do NOT transform a “financially destitute senior … into a healthy senior by turning mortgage payments into income.” That sounds more like a “snake oil” version of the financially sound HECM product I have come to know and happily represent.

Here is an actual story told to me by an originator at our branch. His father knew the judge in these actual events. The son warned me never to talk to the judge about reverse mortgages.

There was a Superior Court judge in Southern California who got a HECM from his “friend.” The friend showed the judge how the line of credit grew and told him it was income. The judge was overburdened with a difficult trial he was presiding over and was at the same time caught up in evening hearings as a consulting judge to administrative judges within the Superior Court system. So he listened to his friend believing he did not have to do much due diligence since his friend represented a major bank.

The friend had told him that the line of credit produced income because the government was paying the senior not to use the available line of credit. He showed the judge a strategy to just take the monthly growth in as additional “income.” The potential ROI on this deal was just amazing per his friend.

When it came time for application, the judge went into recess and hurriedly signed the app docs. Processing was less than 2 weeks. At closing, once again the judge hurriedly signed the loan docs.

The friend heard nothing from the judge for a number of months and then came THE call. The judge was under a much less stressful calendar and looked through all of the app and loan docs including his monthly mortgage statements. What the judge saw on those monthly statements ended all trust he had in the ability of his friend to present anything on financial matters.

The judge yelled at his friend: “Why is my mortgage statement increasing for the ‘income’ I am receiving? You never told me these were loan proceeds!!!”

Well to shorten the story, it seems the lender “found a way” to rescind the HECM origination and fully restore the judge back to his original position; however, the friend was soon originating for a different lender and there is one Superior Court Judge in California who has nothing nice to say about the way HECMs are explained to seniors as your response to John so plainly confirms.

John A. Smaldone

Good morning EricSD,

You bring up some very good points. However, if the fixed rate product would be changed the way I proposed and keep the LTV the same as it is today, it will be an attractive product in the market place. Not only that but it will help those who truly need the higher LTV to pay off debt, existing mortgage ETC. It would even give the senior more funds to put in a line of credit, which we would all like to see.

You are right about the ARM as far as today’s rules go. If they maintain that rule or not is yet to be seen.

I hope I answered your question to your satisfaction. If I did not, let me know. Thanks again for your questions and make it a great weekend.

Getting rid of mortgage expense increases disposable income.You can spin it any way you want.You don`t get income with reverse mortgages without an expense.I always said Reverse Mortgage Loan Officers need 8 hours of Reverse Mortgage con ed instead of general courses.

tom mastromatto

My Mistake I should have termed it discretionary income The amount of an individual’s income available for spending after the essentials (such as food, clothing, and shelter) have been taken care of .

The_Cynic

Thomas,

Let us just say that anecdotes and hearsay are “interesting” but hardly portray the actual situation.

Are you saying the American Economist is the model of separating fact from hearsay? If so, modelling your responses after their way of making such responses would be an improvement.

James_E_Veale_CPA_MBT

Hey John,

Happy New Year!!!

I have been following this thread.

It is very hard for me to believe that any lender would offer a fixed rate open end HECM. There are few, if any, ways both lenders and the secondary market would find that acceptable unless HUD protected them from arbitrate earnings’ losses.

If Congress (or HUD) agreed to guarantee arbitrage losses on fixed rate open end HECMs, HUD would force me to agree with Senator McCaskill about the threat HECMs are on the American Taxpayer. (Such thoughts make me very, very ill and I already have the flu).

Perhaps you can explain why my conclusions are wrong.

Have a very prosperous 2013!!!

James_E_Veale_CPA_MBT

Thomas,

In following this thread, it seems as if this is a good place for me to step in and clarify the issue.

You chose an somewhat agreeable definition of discretionary income yet it does anything but prove HECM proceeds are income; in fact it shows they are not income.

For example what happens if the senior had no existing mortgage at HECM funding and is simply taking tenure payments. Discretionary income does not increase because there is no income. Now let us say there were existing mortgage payments prior to the funding of a HECM and as a result of funding discretionary income does increase. Based on your definition it is not the minuend, i.e., the income part of the formula which goes up but rather one of the costs which you called essentials which goes down.

What you demonstrated is that HECM proceeds do not increase disposable income unless some cost is decreased as a result. If HECM proceeds were income, disposable income would always rise whenever it was paid to the borrower but such is not the case.

Perhaps the issue is most easily seen from Enron. The courts correctly determined that when Enron included loan proceeds in income such inclusion was fraud.

So I caution you on your improper naming of HECM proceeds as income. They are cash inflows but NOT income.

EricSD

Hi Again John,

I understand what you are proposing, and I would love to see it! But I am still not clear on what you are saying about the higher LTV. As of today the standard adjustable product has the exact same LTV as the standard fixed. I realize that with the fixed the rebate is high enough now to do a “No Fee Loan” but some lenders are offering a pretty good rebate on the adjustables to help with these costs if neccessary. Can you tell me what I am missing? EricSD